May 8, 2020

Rip Off the Band-Aid | Chamath Palihapitiya on Business Casual Podcast

Check out the Business Casual Episode Page & Show Notes

Key Takeaways

• In a healthy economy, if a company loses money and sells a fundamentally flawed product, it goes bankrupt and liquidates its assets
  • Instead, now we have zombie companies staying on life support
• Steps to a healthier economy:
  • 1. Much stricter limits on what a balance sheet needs to look like to be rated as high-quality debt
  • 2. Disincentivize people from not investing in the future
  • 3. Create positive incentives to better capitalize on R&D
  • 4. Additionally, limit how much leverage hedge funds have
• If it was up to Chamath, he would have an entire wave of spending on next-generation things (E.g. best healthcare, education, next-gen military)
• The damage done by COVID-19 is ripping apart working and middle-class families. It will only be apparent in a few months, and they need more support than corporations
• Should billionaires exist? “Of course they should, it’s an embodiment of the fact that people can be successful” – Chamath Palihapitiya
• Bitcoin is an insurance policy
  • Buy a very small amount (1% of your net worth) and don’t ever look at it, it may save you someday

Intro

• Chamath Palihapitiya (@chamath), is the CEO of Social Capital
  • Check out the Podcast Notes from part 1 of this interview and these Podcast Notes from his appearance on The Pomp Podcast
• Host: Kinsey Grant (@KinseyGrant)

Why aren’t Zombie Companies Failing?

• There is enough debt, banks, and debt buyers in the world that allow these companies to stay on life support
  • In a healthy economy, if a company loses money and has a fundamentally flawed product, it goes bankrupt and liquidates its assets
• Instead, now we have zombie companies focus on profiteering in the short term
  • A glaring example: IBM is a $100B company that spent $140B on stock buybacks
  • IBM’s last CEO over-saw 24 quarters of declining revenue and rising compensation

Steps to a Healthier Economy

• 1. Much stricter limits on what a balance sheet needs to look like to be rated as high-quality debt
• 2. Disincentivize people from not investing in the future
  • Prevent buybacks and dividends when companies have enormous profits
• 3. Create positive incentives to better capitalize on R&D
  • E.g. Hiring an R&D engineer in Canada can come with tax credit almost 3 times the salary
• 4. Additionally, limit how much leverage hedge funds have
  • Big leverage means the bigger you are, the less likely you are to fail because somebody will bail you out
  • As the old adage goes “if I owe the bank a $1,000 that’s my problem, but if I owe the bank a billion dollars, that’s their problem”

Policy Response to Address Economic Problems

• If it was up to Chamath, he would have an entire wave of spending on next-generation things (E.g. best healthcare, education, next-gen military)
  • US government proved it’s willing to spend trillions. It will be better directed at innovation and productivity as that gets money flowing downstream
• Medium-term: be a bridge, individuals needs support more than corporations
  • The damage done by COVID-19 is ripping apart working and middle-class families. It will only be apparent in a few months, and they need more support than corporations
• The wealthy are doing fine in this economic crisis.
  • “I would rather the younger version me gets taken care off before the older version of me” – Chamath Palihapitiya

Should Billionaires Exist?

• “Of course they should, it’s an embodiment of the fact that people can be successful” – Chamath Palihapitiya
• For most people, money is a byproduct of something they did, not as a result of obsessing about getting rich
  • You want that example for the coming generations
  • Imagine an NBA where if you are good as LeBron James, you will be allowed to play only 5 minutes per game

The Role of Luck in Success

• Imagine a cloud that has a magic drop of rain that makes you successful
  • Your job: To work hard to be as large as possible to increase your chances of the raindrop hitting you
  • The real problem: Not being able to grow regardless of how hard you work
• Fix the real problem instead of “shooting the cloud”

A Day in the Life of Chamath during COVID 19 Lockdown

• Wakes up at 7, checks email and public markets
• Breakfast in bed
• Aims at getting 10,000 steps per day, and does yoga twice per week via Zoom
• Chamath is watching Billions
• Sleep by 11-12
• Allocate part of the day to calling friends
• Take away: During a lockdown, following a strict routine will minimize your anxiety

Most Controversial Takes

• The economy is heading towards a depression, 2 events may occur:
  • China invades Taiwan to get access to key technologies
  • The Middle East fragments up into many smaller countries

Chamath: In on Bitcoin

• He started buying Bitcoin back when it was $85 per bitcoin, he sees it as an insurance policy
• If we don’t fix the combination of capitalism and democracy, we will go through a financial cataclysm, and people will lose faith in the US system
  • Buy a very small amount (1% of your net worth) and don’t ever look at it; it may save you someday